[2009] UKFTT 321 (TC)

TC00264

AGGREGATES LEVY – levy applicable to rock fill dam – whether ‘commercial exploitation’ - whether rock again becomes part of the land at the site from which it is won – Finance Act 2001 Sections 16, 17 and 19 –  Appeal allowed.
- whether tax credit due on aggregate commercially exploited forming rock fill dam as part of a hydro electric project – industrial process – production of energy.  Finance Act 2001 Section 30 – Aggregate Levy (General) Regulations 2002 – Opinion.

FIRST-TIER TRIBUNAL

TAX 

	HOCHTIEF LTD	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (AGGREGATE LEVY)	Respondents

				TRIBUNAL JUDGE: 	W Ruthven Gemmell, WS 
				MEMBERS:		S A Rae, LLB, WS
							Dr Heidi Poon, CA., CTA

Sitting in public in Edinburgh on 22–23 September 2009

Rupert Baldry, Counsel for the Appellant

Ian Artis, Counsel for the Respondents

© CROWN COPYRIGHT 2009

DECISION
Introduction

1.	The Appellant, Hochtief (UK) Construction Limited (“HCL”), was a member of the Hochtief Glendoe Joint Venture appointed as main contractor for the construction of a hydro electric electricity power station at Glendoe, Inverness-shire (“the Project”) by Scottish and Southern Electricity plc (“SSE”).  The Project was constructed according to specifications agreed with SSE.  
2.	The Project involved the removal of peat and till to form a basin (hereinafter “the reservoir”) to contain water; an impounding dam to seal the reservoir (“the dam”); the construction of a network of intakes, pipelines and tunnels to divert water to the reservoir; a control building at the head of the dam; a power tunnel carrying water to a power house; the construction of an underground power house; the installation of a turbine generator and building temporary roads, buildings and storage areas.  The Project commenced in approximately January 2006 and was completed in December 2008.  The contract price for the Project was approximately £150 million.  Some of the land used for the Project was owned by SSE and the remainder was owned by third party landowners.  The dam was constructed of rock and then faced with concrete on one side.  
3.	In order to construct the dam approximately 1,039,000 tonnes of rock were removed from the quarry site which was approximately 100 metres at its nearest point to the nearest point of the dam.  Some of the rock was crushed and screened to a smaller size before being used and was classified into five different zones.  A cross section of the dam showed it to be triangular shaped.  When this had been built up with different zones of rock a 300 millimetre thick concrete slab was then applied to the waterside of the dam so as to provide a waterproof impermeable barrier.  The concrete used in the dam was not the subject of the Appeal.  The quarry site was within the footprint area of the reservoir.
4.	Formally, there were several consolidated Appeals before the Tribunal-
(a) A decision by the Commissioners to register HCL compulsorily for the purposes of Aggregates Levy on rock with effect from 1 January 2006 under Finance Act 2001, Section 16.
(b) An assessment to Aggregates Levy totalling £1,663,273 under Finance Act 2001, section 2 (2)(d).
((a) and (b) collectively hereinafter referred to as “the Appeal on Liability”).
and 
(c) A decision by the Commissioners to refuse a claim for a tax credit of £1,663,273 under Regulation 30(2) of the Aggregates Levy (General) Regulations 2002 SI 2002/761 hereinafter referred to as “the Tax Credit Appeal”. 
5.	The decisions and assessments were all upheld on review.  It was not necessary for the Tribunal to deal with the arithmetic details of the assessments.  The Tribunal was asked to determine these on principle.  
6.	In the event of the Tribunal finding in favour of the Appellant on the Appeal on Liability, the Tax Credit Appeal falls.
7.	The Aggregates Levy was introduced by the Finance Act 2001 which as amended, remains the relevant legislation, Section 16 imposes the charge –
(1) A levy, to be known as aggregates levy, shall be charged in accordance with this Part on aggregate subjected to commercial exploitation. 
(2) The charge to the levy shall arise whenever a quantity of taxable aggregate is subjected, on or after the commencement date, to commercial exploitation in the United Kingdom. 
(3) The person charged with the levy arising on any occasion on a quantity of aggregate subjected to commercial exploitation shall be the person responsible for its being so subjected on that occasion. 
(4) The levy shall be charged at the rate of £1.60 per tonne of aggregate subjected to commercial exploitation; and the amount of levy charged on a part of a tonne of aggregate shall be the proportionately reduced amount. 
(5) The levy shall be under the care and management of the Commissioners of Customs and Excise (in this Part referred to as “the Commissioners”). 

8.	Accordingly, liability to the tax arises when (a) there is a taxable aggregate; (b) it is subjected to exploitation and (c) the exploitation is commercial.  Accordingly, a tax payer may escape liability if, although taxable aggregate has been exploited, it has not been commercially exploited.
9.	Section 17 of the Finance Act 2001 defines “aggregate” and “taxable aggregate”-
(1) In this Part “aggregate” means (subject to section 18 below) any rock, gravel or sand, together with whatever substances are for the time being incorporated in the rock, gravel or sand or naturally occur mixed with it. 
(2) For the purposes of this Part any quantity of aggregate is, in relation to any occasion on which it is subjected to commercial exploitation, a quantity of taxable aggregate except to the extent that— 
(a) it is exempt under this section; 
(b) it has previously been used for construction purposes (whether before or after the commencement date); 
(c) it is, or derives from, any aggregate that has already been subjected to a charge to aggregates levy; 
(d) it is aggregate that was removed from its originating site before the commencement date. 
10.	If, therefore, the material falls within one or more of the paragraphs of Section 17 (2) it is not taxable aggregate.  It was accepted by the parties that the rock was aggregate and was a quantity of aggregate which would be taxable if subjected to commercial exploitation.
11.	Section 91 defines “subjected to exploitation” as follows-
(1) For the purposes of this Part a quantity of aggregate is subjected to exploitation if, and only if— 
(a) it is removed from a site falling within subsection (2) below; 
(b) it becomes subject to an agreement to supply it to any person; 
(c) it is used for construction purposes; or 
(d) it is mixed, otherwise than in permitted circumstances, with any material or substance other than water. 
(2) The sites which, in relation to any quantity of aggregate, fall within this subsection are— 
(a) the originating site of the aggregate; 
(b) any site which is not the originating site of the aggregate but is registered under the name of a person who is the operator of that originating site, or is one of its operators; 
(c) any site not falling within paragraph (a) or (b) above to which the quantity of aggregate had been removed for the purpose of having an exempt process applied to it on that site but at which no such process has been applied to it. 
12.	Section 48 (2) defines “use for construction purposes”-
(2) References in this Part to the use of anything for construction purposes are references to either of the following, except in so far as it consists in the application to it of an exempt process, that is to say— 
(a) using it as material or support in the construction or improvement of any structure; 
(b) mixing it with anything as part of the process of producing mortar, concrete, tarmacadam, coated roadstone or any similar construction material. 
13.	It was accepted by the parties that the rock was subjected to exploitation as it was used for construction purposes and those construction purposes were it being used as a material or support in the construction or improvement of any structure, namely the dam.
14.	Section 19(3) provides that a quantity of aggregate is subjected to “commercial exploitation” if a number of cumulative conditions are met-
(3) For the purposes of this Part the exploitation to which a quantity of aggregate is subjected shall be taken to be commercial exploitation if, and only if— 
(a) it is subjected to exploitation in the course or furtherance of a business carried on by the person, or one of the persons, responsible for subjecting it to exploitation; 
(b) the exploitation to which it is subjected does not consist in its removal from one registered site to another in a case where both sites are registered under the name of the same person; 
(c) the exploitation to which it is subjected does not consist in or require its removal to a registered site for the purpose of having an exempt process applied to it on that site; 
(d) the exploitation to which it is subjected does not consist in or require its removal to any premises for the purpose of having china clay or ball clay extracted or otherwise separated from it on that site; and 
(e) the exploitation to which it is subjected is not such that, as a result and without its being subjected to any process involving its being mixed with any other substance or material (apart from water), it again becomes part of the land at the site from which it was won. 

15.	It was common ground that the conditions set out in Sections 19(3)(a) being a positive condition was fulfilled, that the conditions in (b) to (d) being negative conditions were not applicable and so the subject of this Appeal came down to an interpretation of condition (e).
16.	In relation to the Tax Credit Appeal, Section 30 of the Finance Act 2001 provides for a tax credit-
(1)	The Commissioners may, in accordance with the following provisions of this section, by regulations make provision in relation to cases where, after a charge to aggregates levy has arisen on any quantity of aggregate-
…….
(c) any of that aggregate is used in a prescribed industrial to agricultural process;
…….
(2)	The provision that may be made in relation to any such case as is mentioned in subsection (1) above is provision-
(a) for such person as may be specified in the regulations to be entitled to a tax credit in respect of any aggregates levy charged on the aggregate in question;

17.	The Commissioners have made regulations under Section 13 of the Aggregate Levy (General) Regulations 2002 which at Regulation 13 provide-
(1)	This regulation applies to a person who has commercially exploited taxable aggregate and who has accounted for the AL chargeable on that commercial exploitation.
(2)	Such a person is entitled to a tax credit in respect of any AL accounted for in respect of that commercial exploitation where the taxable aggregate in question.
…..
(c) is used in any of the industrial or agricultural processes listed in the Schedule;

18.	The Industrial processes included in the Schedule are-
006	Production of energy.	
008	Refractory processes.	
029	Production of play sand e.g. for children's sand pits.	
035	Manufacture of fire extinguishers.	
036	Manufacture of materials used for fireproofing.	

19.	In summary, therefore, if the rock removed from its site is taxable aggregate used for construction purposes as a material or support in construction of a structure, the aggregate is subject to exploitation, if and only if, it is exploited commercially.  The issue before the Tribunal on the Appeal on Liability was whether or not the exploitation to which the rock is subjected is such that, as a result and without its being subjected to any process involving its being mixed with any other substance or material (apart from water), it again becomes part of the land at the site from which it was won.  
20.	If the issue is decided in the Appellant’s favour, the assessment and the Tax Credit Appeal fall. 
21.	In relation to the Tax Credit Appeal the question before the Tribunal is whether or not the aggregate forming the dam is used in a prescribed industrial process, namely the production of energy.  If the Tribunal find in favour of the Appellant they are entitled to the tax credit.
22.	The Appellant was represented by Mr Rupert Baldry, Barrister and Her Majesty’s Commissioners of Revenue and Customs (“the Commissoners”) by Mr Ian Artis, Advocate.
The Agreed Facts
23.	The parties had agreed some of the relevant facts.  These are set out in summary form even though some will require further explanation and slightly paraphrased, they are-
24.	The key phases in the Project were the construction of the access roads, the construction of the dam, the construction of the tunnels and pipelines for the reservoir, the construction of the underground power house and the installation of the turbine generator.
25.	The Project was completed and handed over to SSE on 18 December 2008.  A drawing “General Site Layout: Dam Area” (Drawing number 1512/DT50/00/01/01/00) “Dam Area Drawing” was a materially true and accurate representation of the general site layout.  This plan showed the reservoir and the dam.  The dam is built of rock and faced with concrete.
26.	In order to construct the dam on a solid base, peat, till and soft rock in the footprint of the dam were excavated to a depth of up to twelve metres.  Approximately 1,039,000 tonnes of rock was removed from the quarry site which was approximately 100 metres at its nearest point from the nearest point of the dam.  Some of the rock was crushed and screened to a smaller size before being used.  A thin layer of coarse placed rock was then used to cover the non water (downstream) side of the dam. In order to provide a durable surface, a 300 millimetre reinforced concrete slab was cast over a layer of concrete on the water (upstream) side of the dam.  The concrete used in the slab is not the subject of this Appeal.  
27.	The dam is approximately 930 metres long; the maximum height of the dam above the original ground level is approximately 35 metres.  At its widest point, the dam is approximately between 100 metres and 125 metres in width and at its narrowest point is 25 metres in width.
28.	The rock was removed from a quarry which is in the footprint of the reservoir and is now covered by water.  On 16 November 2007 the Commissioners sent a letter to the Appellant stating they believed the Appellant had a liability to Aggregates Levy based on the site of the rock and the construction of the dam and threatened to register the Appellant compulsorily for Aggregates Levy.  
29.	Early in 2008 the Appellant decided to use naturally occurring sand on the site, at the far end of the reservoir from the dam, for producing concrete and submitted an application for registration for Aggregates Levy in respect of its proposed use of the sand on 13 March 2008.  On 31 March 2008 the Commissioners stated that because the Project began in January 2006 they would treat 1 January 2006 as being the effective date of registration.  In April 2008 the Appellant queried why the registration had been backdated to the start of the project.  The Commissioners confirmed they had done so because they considered the use of the rock in the dam subject to the Aggregates Levy.
30.	In May 2008 an internal review of the decision to backdate the registration was requested by the Appellant.  On 27 May 2008 the Commissioners made three more reviewable decisions; a decision to assess the Appellant to £1,663,273 of Aggregates Levy in respect of the construction of the dam and a notice of assessment was issued on 4 June 2008; a decision not to charge a mis-declaration penalty; and a decision to charge penalty interest on the assessment.  In June 2008 the Appellant asked for a review of the decisions of 27 May.
31.	The decisions were all upheld and a Notice of Appeal on behalf of the Appellant was delivered to the Tribunal on 24 July 2008.  The Appellant was not able to submit a claim for an industrial process credit until the project began to produce electricity.  
32.	The rock was not mixed with any other substance or material (apart from water) at any time during the construction of the dam.  The hydro electric power is generated by the force of water driving generation machinery.  In most hydro electric schemes, including Glendoe, the water is held behind a dam forming a reservoir.  The water is released from the reservoir when required through screens located in the headrace tunnel intake structure to flow down to the underground power station (at Glendoe, via a six kilometre long tunnel) and spins the blades of a large turbine.  The turbine is connected to a generator that creates electricity as it spins.  The dam collects and stores water.  The dam stores potential energy by restraining the flow of water from the reservoir to a lower elevation.  The potential energy is converted to kinetic energy as the water is released from the reservoir and moves under the action of gravity.  The kinetic energy is transferred to the turbine blades in the machinery which drives the generator which in turn produces electric energy as efficiently as can be contrived.
The Tribunal also had a number of technical drawings including cross sections of the dam and photographs.
The Evidence
33.	The Tribunal heard evidence from David Kerly, HCL’s Commercial Manager on the Project, who affirmed his written statement and was cross examined; and from Neil Davidson and Alan Donnachie responsible for the assessments and the reviews, for the Commissioners, both of whom were not cross examined and confirmed the terms of their written statements.  Mr Kerly is a Fellow of the Royal Institute of Chartered Surveyors and an Associate of the Chartered Institute of Arbiters with 47 years of experience of work in the construction industry.  He has worked on civil engineering projects both in the UK and internationally as a quantity surveyor and commercial manager.  He started work with HCL in January 2004 as the bid manager for the Glendoe tender process spending the first year on the bid itself and a further year  negotiating the contract with SSE.
34.	In January 2006 Mr Kerly became the commercial manger responsible for the day-to-day commercial supervision of the Project and remained so until October 2008, just short of three months of the Project being handed over to SSE.  He was also the principal point of contact with HMRC until 9 June 2008.  Mr Kerly, therefore, was knowledgeable of the nature and construction of the dam, the function of the dam and the production of electricity, the role of HCL in the Project and the background to the dispute.
35.	The Project was believed by Mr Kerly to be the largest hydro electric scheme to be built in the UK for some forty to fifty years and that the dam was the first to be built as a concrete faced rock dam (i.e. a dam that is constructed by using pure rock without adding concrete save for a thin slab on the reservoir side).  The hydro scheme is designed to produce up to 100 megawatts of energy which, according to SSE, is enough to power every home in a city the size of Glasgow.  Mr Kerly believes that the dam has the highest drop from the reservoir to turbine of any hydro electric station in the UK.
36.	Much of the evidence given by Mr Kerly referred to the definition of the site and reference was made to the plan, part of the agreed facts between the parties, being entitled the General Site Layout.  It became clear during evidence by Mr Kerly the area of dam operations identified in the plan “General Site Layout:Dam Operations” was only part of the whole site which was very much larger when account was taken of the areas for the intake tunnels and the area which was being used to form the reservoir.  Leading from the dam was a six kilometre tunnel in length and five metres in diameter to the power station and from the power station was a further tunnel heading towards Loch Ness where the water utilized in the production of energy would flow.  The area of the whole site for which planning permission was given for the Project was made, by reference to a plan which represented “the Whole Site of the Project”.  The General Site layout including the reservoir and the dam, therefore, measured against the area of the Whole Site of the Project, represented approximately ten per cent.
37.	An aerial photograph of the site prior to the construction of the dam was tabled and on this was marked the area of the quarry from which the rock to construct the dam was obtained.  It was also noted in evidence that leaving aside the concrete outer covering of the dam it was constructed 99.9% of rock obtained from the quarry.  As mentioned above the quarry is within the reservoir footprint, and is consequently now under water, as planning permission could only be obtained for a quarry if it were to be hidden and be below the water line so it would not be an eyesore.  Some of the land, principally that containing the dam structure and the power station, were acquired by SSE but all other land was owned 50% by Glendoe Estates and 50% by Garriogie Estates.  
38.	In order to construct the dam on a solid base, the peat, soil, organic matter and soft rock in the footprint of the dam were removed to a depth of up to twelve metres to reveal solid rock.  Rock was then extracted from the quarry site specifically created for use in building the dam.  The aggregate was taken by dump truck across the shortest route to the dam.  No rock was taken from a borrow pit (one of the separate areas where rock could be temporarily taken from the land and subsequently replaced).  Approximately 361 thousand tonnes of rock were removed from the quarry site and used to fill the area from where the peat, soil, organic matter and areas of soft rock had been removed.  Then approximately 678 thousand tonnes of rock removed from the quarry site were used to create the dam above ground level.  Some of the rock was crushed and screened to a smaller size and this took place within the quarry area.  The rock was not mixed with any other substance with the exception of water at any time during the construction of the dam.
39.	The dam, therefore, was partially below the previous ground level and partly above and rose (when looked at in cross section) in a triangular form.  On one side was fixed a concrete plinth to provide water impermeability.  This was affixed by using an extruded curb machine which travels along the face of the aggregate pouring concrete so as to create a step structure.  The step structure allows the plinth to be locked in to the structure.  Mr Kerly believed the working life of the dam was 75 years.
40.	Outline planning permission for a quarry site had been obtained by SSE and the quarry was identified before work began on the site.  The exact location of the quarry was not specified when planning permission was granted and it was up to HCL to find the best location within the footprint of the reservoir.  The footprint of the reservoir is also known as the impounded area and Mr Kerly confirmed that the quarry was within the impounded area. 
41.	A number of the photographs of the dam were identified.
42.	In constructing the reservoir, the embankment was completed before the dam.  Then the headrace tunnel, which runs in total for a distance of eight to nine kilometres and which is five metres in diameter, and was bored through rock was constructed.  The furthest extents of the Whole Project Site were approximately nine kilometres on either side from the centre of the reservoir and part of the installation to capture water was as far away as four kilometres from the reservoir.  It was established that the distance range from the quarry to the dam was at its lowest between six and one hundred metres and at its highest about one thousand metres, meaning the average was about five hundred metres.
43.	No processes relating to the crushing and grading of the rock were carried out on the footprint of the dam and there were no temporary stockpiles of rock.
44.	Evidence was led in relation to the sand that was found within the footprint of the reservoir, and which it was decided should be used for the production of concrete, for which Aggregates Levy was registered and paid.  The registration form was dated 6 March 2008 and contained an explanation that the sand was not being sold but was being used in the construction on the site for the Appellant’s own purposes.  On this form no date was given as to the first commercial exploitation of the aggregate.  The registration form was accompanied by an “Aggregates Levy Site Details form”.  The registration form specifically asked for an ordnance survey grid reference where the applicant is asked to give the grid reference of the entrance to the site.  It was shown in evidence that the grid reference given was the approximate position of the material.  A note on the form stated that an Ordnance Survey map could be produced showing the limits “of our site if required”.
45.	Although the exact date of the commercial exploitation of the sand was not disclosed it was confirmed that this would have been after 6 March 2008 when the registration was made.
46.	The statements of Mr Davidson and Mr Donnachie were unchallenged and related to the correspondence, assessments and reviews which are the subject of the Appeal.
47.	All the witnesses were considered by the Tribunal to be credible.
Findings
48.	The Tribunal were required in light of the evidence submitted for the Appeal on Liability to consider the construction of Section 19(3)(e) of the Finance Act 2001.  In so far as the parties were agreed that the rock used in the construction of the dam was aggregate within the meaning of Section 17(1); the dam was a structure; aggregate was used as a material or support in the construction of this structure within Section 48(2) and was therefore used for construction purposes within the meaning of Section 19(1)(c).  The aggregate was therefore subject to exploitation within the meaning of Section 19.  It was common ground by the parties that the conditions set out in Section 19(3)(a) to (d) were satisfied.
49.	Aggregate levy is charged on aggregates “subject to commercial exploitation” and exploitation of aggregate is not commercial in terms of Section 19(3)(e) if the aggregate, without being subjected to any process involving it being mixed with any substance or material (apart from water), again becomes part of the land at the site from which it was won.  It was conceded by the parties that the aggregate was not subject to any process which involved it being mixed with any other substance or material other than water.  The issue at dispute was whether the aggregate “again became part of the land at the site from which it was won”.  
50.	“The Aggregates Levy was introduced in the United Kingdom by the Finance Act 2001 with a view to discouraging quarrying, the primary purpose of which was the production of aggregates whilst at the same time facilitating other processes which might produce aggregate as a waste product.  Aggregate is defined broadly and made the person who first commercially exploited the aggregate liable to the charge but then established a range of exemptions based on the content of the aggregate or the process by which it was obtained.  The exemptions make some fine distinctions which are difficult to apply.”  [British Aggregates Associates v  HM Treasury [2002] EWHC 926 per Mr Justice Moses].  The introduction of the Aggregates Levy followed research that had shown significant local environmental costs associated with the extraction and transport of aggregates.
51.	By provision of Section 19(3), aggregates levy is only charged on aggregate which is subjected to commercial exploitation.  By specific provisions of Section 19(3)(e), aggregates levy will not be charged where the aggregate is not mixed with other materials (other than water) and where the result of the exploitation is that the aggregate again becomes part of the land at the site from which it was won.
52.	The Commissioners noted that one of the circumstances in which aggregate is commercially exploited is when it is removed from its “originating site” defined under Section 20(1)(d) to include “the site from which the aggregate was won, or as the case may be, from which it most recently won.  This it was argued showed the intention of Parliament “to tax the exploitation of virgin aggregate whether it is first won from a site or again becomes part of the land at that site and is won from it again”.  By this interpretation the word “again” must have its full weight and mean the aggregate was once part of the land at the site and, therefore, the rock was part of the site of the quarry and not the site of the dam and needed to be returned there to “again” become part of the land.  The Tribunal noted that Section 19(3)(e) did not provide for aggregate to be “returned”.  Instead it required that it should again become part of the land from the site at which it was won; that to “return” aggregate to the same site in the same way as it was extracted was likely to be impossible and that the extent of site could not be defined so narrowly to make a distinction between the site at the quarry and the site of the dam.
53.	The Tribunal then considered the question of whether the aggregate “becomes part of the land”.  The Commissioners’ submission was that, based on their definition of the site, the aggregate was not returned to the land from which it was won so that it could not become part of it; it became part of a new structure of a dam and was not land.  A distinction was made as between the part of the dam that was below the former ground level and the part of the dam that was above it.  There was consideration of the law of property under the Law of Scotland and whether this was of help in interpretation of the tax statutes.  It was agreed by the parties that this was not relevant in the construction of Section 19(3)(e).
54.	The Appellant argued that there was no distinction between the rock below and above the former ground level; and the aggregate became part of a structure namely the dam and this did not prevent the aggregate from again becoming part of the land. “Land” is not specifically defined for the purposes of the Finance Act 2001.  
55.	On the definition of “land” and the issue of the structure of the dam rising above the previous level of the ground the Tribunal were persuaded by the definition of the Interpretation Act (1978 Schedule 1) which provides that-
“land” include buildings and other structures and any land covered by water…...” 
and consequently that the construction of the dam itself, therefore, was part of the land for the purposes of Section 19(3)(e).  The Tribunal was then required to consider the meaning of “the site from which it was won” and this was at the heart of the dispute. 
56.	 The Commissioners’ submission was that the site was the footprint of the dam and that this was different from the footprint of the quarry so that there were two sites.  The Appellant’s view was that the site was the construction site and that the rock was simply moved from one part of the site to another.
57.	The site for the Whole Project could be and, for planning purposes, was a large area of many square kilometres.  This included the site of the power station, some six kilometres away, the headrace tunnel of six kilometres in length and five metres wide, the areas from which the intake tunnels were constructed and access roads.
58.	The area of the site agreed by the parties being “General Site Layout:Dam Area” represented approximately ten per cent of the site for the Whole Project but was where the bulk of the construction work took place and included the area of the dam and the reservoir.  The area of the reservoir contained the quarry and where the rock was removed from the quarry to form the dam, the quarry was then filled with soil and till and rock and when the reservoir filled with water was covered with water and became part of the reservoir.  This latter point was particularly persuasive to the Tribunal.
59.	The footprint of the quarry was not on an area of land several kilometres away from the footprint of the dam.  It was on land that became part of the reservoir which was created when the dam was built and the water captured.  The point was made that sand was found at the far end of the reservoir area some several kilometres away from the dam and was transported to make concrete.  The Tribunal noted that as the sand was mixed with substances other than water it could not claim exemption from commercial exploitation under section 19(3)(e).
60.	 Little help was given by the Commissioners’ registration for the levy on the rock because unlike the registration for the sand no “Area of Site” form was produced.  In any event, the Area of Site form which was used for the sand was of little indicative value to the Tribunal as the Ordnance Survey reference was provided only for the purposes of identifying “the entrance to the site” and the offer by HCL to provide an Ordnance Survey map of the site noted on the form was not accepted.  The Tribunal were directed to the case of –
Commissioners of Customs and Excise v East Midlands Aggregates Ltd – 23 April 2004 [2004] EWHC 856 (Ch)
This decision of the High Court upheld the Manchester Tribunal in Commissioners of Customs and Excise v East Midlands Aggregates.  There the Tribunal, in an approach endorsed by the Court, took the view that a narrow construction of “the site of the proposed building” was inappropriate.  The Tribunals decision and reasoning at paragraphs 26 and 27 were specifically upheld by Mr Justice Rimmer at paragraph 24 of his Judgment as follows-  [The Tribunal had pointed out that the Act defined neither site nor building but the new warehouse would obviously be a building but the lorry park however could not realistically be described as a building.  However the Tribunal continued;]
26. I am satisfied that `site' is not to be construed as narrowly as Mr Sephton argued.  Even if one assumes that the foundations of a building are confined to its footprint (and that may not always be a correct assumption) it is almost inevitable that pipes and cables will not be so confined, since their purpose is to enable supplies of water, gas and electricity, to be obtained from sources remote from the building and, in the case of pipes, to provide for the discharge, away from the building, of effluent.  The plans produced at the hearing show that the drains serving the building are to be laid, at least in part, beneath the lorry park.  I cannot accept that it could have been the intention of Parliament that the exemption should extend only to the material removed from the footprint of the building in order to accommodate such pipes and cables, while aggregate removed from the immediate area of building operations but outside the footprint of the building itself would be taxable.  I am satisfied that the word `site' is to be construed so as to include the whole area of land on which the work of erecting a building is to be undertaken.  In reaching that conclusion I have been conscious that there is no threshold of value, weight or volume below which aggregate is not taxable or the person exploiting it is not required to register, and that the tax is charged proportionately on quantities less than a tonne.  If Mr Sephton is right, a jobbing builder constructing a new conservatory in a customer's garden would be required to register, and account for tax of 16p, if he necessarily removed 100 kg of sand in the course of laying a rainwater drain leading from the conservatory to the nearest connection, and would be liable to a penalty if he failed to do so.  That clearly cannot have been the intended consequence of the legislation.
27. The lorry park, in my view, comes within the immediate area of building operations.  Since, as I have already commented, the limitation in paragraph (b)(ii) is not restricted to the foundations of a building, nor to pipes and cables serving a building, I conclude that the material removed from the land in order to make possible the construction of the foundations of the lorry park (which are co-extensive with its surface), and the installation of the drains to it, is also exempt.
61.	Mr Justice Rimmer at paragraph 23 of his judgment suggested that the test could be applied by asking ten people lined up to identify a site.  The Tribunal was persuaded that such people would not consider the footprint of the dam as one site and the footprint of the quarry as another.
62.	The Tribunal considered the distance of the quarry from the dam but found that this in itself (because it was only an average of five hundred metres) was no more persuasive than if it had been two kilometres as long as all were within the, sensible workable meaning of the word, “site”.
63.	Lastly, in consideration of the definition of “site”, the Tribunal took account of the scale of the project which was a major civil engineering project and within this the size of the area that was required for the dam and reservoir.
64.	The Tribunal noted that the Commissioners have under Sections 24(6) and (7) of the Act the authority to set the boundaries of a site “as appear to the Commissioners best to secure that avoidance of the levy is not facilitated by the registration of any part of any premises that is not used in, amongst other things, winning any aggregate”.
65.	The word “site” is nowhere defined in the Act and is used in different contexts.  The Tribunal determined “the site” to mean the “General Site:Dam Construction” as agreed by the parties and consequently that the footprint of the quarry and the footprint of the dam were within the same site.
66.	The Tribunal next considered whether the site was one from which the aggregate “was won”.  The Commissioners’ submission was that some backfill for the dam was not from the quarry; that “won” is not the same as “used”; that the Act refers to the concept of “most recently won”; and that the crushing of the rock did not take place at the dam.  The Tribunal was of the view that the crushing and grading all took place at the footprint of the quarry but found that nonetheless this formed part of the site and it was from this part of the site that the aggregate was won using its ordinary meaning.
67.	The Commissioners made reference to-
Barclay’s Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684
as authority for purposive construction of statutes so as to “have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way to give effect to that purpose”, which quoting Lord Steyn at paragraph 28 “liberated the construction of revenue statutes from being both literal and blinkered”.  Consequently, the Commissioners argued that the levy was aimed at virgin or primary aggregates and that the intention of exploiting the rock fitted this definition.  
68.	Consideration was given to the consequences of the rock when (and if) the dam is demolished in 75 years and whether the aggregate would again be capable of exploitation.  The Commissioners agreed that if the Appeal on Liability was allowed a consequence of this would be that the aggregate would not be capable of commercial exploitation because of the exemption at Section 17(2)(b) and so the rock could not be subject to the Aggregates Levy in future and that this defeats the purpose of the levy on primary aggregate.  The Tribunal whilst accepting this interpretation, noted that the statute provides an exemption where the aggregate is not mixed with any other substance (other than water) and so future use would be limited to one where only rock is required.  Other examples falling within this definition were identified as temporary roads.  Again the same conditions would apply; that the levy could not be charged if only stone or rock in their natural state were used.  The Tribunal considered the building of drystone walls, which are usually constructed from stones in the area of the wall, fashioned and trimmed, to form a wall without the addition of any other substance.  When these walls collapse the remnants are mounds of loose stones.  The Tribunal felt that in applying the law the same principle applied; what was different was the sheer scale of the dam but the legislation made no provision or limit on size and clearly had a purpose in differentiating between “commercial exploitation” and “exploitation”.
69.	The Tribunal found that the conditions of Section 19(3)(e) had been met and that the aggregate had not been commercially exploited.  The Tribunal felt that a sensible working meaning of “site” meant that the footprint of the dam and the footprint of the quarry were one site; there was no distinction, it was the construction site and the site for the purposes of Section 19(3)(e).  The aggregate was not mixed with anything other than water and in its natural state was moved from one area of the site to another.  The Tribunal held that purposive construction did not extend the terms of the sub-section beyond an ordinary and sensible interpretation such as to refuse the Appeal.  It was accepted that rock used in the use of a temporary road would meet the test of the sub-section.  The difference was the scale of the dam and the length of time it was unlikely to be capable of further exploitation both of which the statute took no account. 
70.	The possibility that an aggregate qualifying under this section could avoid future charges related only to a narrow category of aggregate that is unmixed (other than with water).
71.	 As noted, under Sections 24(6) and (7) it is in the power of the Commissioners to define the area of a “site” to prevent avoidance of the levy.
72.	The Appeal on Liability is allowed.
Tax Credit
73.	As the Tribunal allowed the Appeal on Liability the Tax Credit Appeal falls.  Having heard the evidence the Tribunal hold the following view on the Tax Credit Appeal.
74.	The claim for the tax credit required the taxable aggregate to be used in an exempt process, the exempt process being the production of energy.  The Commissioners’ submission was that the aggregate must be used in the production of energy; that the aggregate was used in construction for the production of energy but was not and is not used in the production of energy; that, they submitted, was the natural and ordinary meaning of the regulations as applied to the facts.  
75.	Reference was made to the Notice AGL2 which has no effect in law but which provides guidance and provides various examples of the different types of industrial processes that are allowed exemption.  These draw a distinction between the aggregate properties and the non aggregate properties of an aggregate in relation to these processes and which improve efficiency.  The Commissioners’ submission was that all taxable aggregate would give rise to an entitlement to tax credit if the building or other construction is incorporated into any form of power generation scheme such as the concrete walls of a power station or even the tarmac on a road to a power station.  The Commissioners’ argued that all the exempt processes use aggregates for their other physical properties and in any event not for bulk use and it would be inappropriate that this should apply in relation to a tax on environmental damage and costs.  It was argued that the aggregate can only have one use.  The Appellant’s submission was that the aggregate was used in the construction of a dam and that when the dam became operational and produced electricity then the aggregate was used in the production of energy for the reasons set out in the Agreed Facts; that the dam retained water and created kinetic energy; and through the turbine generated electricity.  The Commissioners argued that the nature of the business is an important consideration and made reference to the case-
MMC Midlands Limited v Revenue and Customs Commissioners [2009] BTC 8071
76.	This case was given as authority for the nature of the business being taken into account and the Commissioners argued HCL’s business was construction and not the production of energy.
77.	The Tribunal considered that the stone used in the construction of the dam was being used for its non aggregate qualities, as a dam, and noted the distinction that not all the exempt industrial processes relied on the physical properties of the aggregate, the most striking example being sand used for childrens’ sand pits which was simply sand.  
78.	The Tribunal was of the view that a rockfill dam may be in a special and possibly singular category in relation to its use in the production of energy and distinguished the use from aggregate used, for instance, as concrete in the construction of a shell to hold an oil filled power station.  This dam was constructed by using pure rock without adding concrete save for a thin slab on the reservoir side, or any other substance. 
79.	The Tribunal was of the view that the aggregate in its natural state, therefore, was a significant part of the hydro electric scheme, that the dam collected and stored water and consequently potential energy by restraining the flow of water which in turn was converted to kinetic energy.  Consequently, the aggregate formed an integral part of an energy production scheme and, whilst noting that rock filled dams may be in a category of their own, was of the view that the Appeal would be allowed.
Costs
80.	 Costs are awarded to the Appellant.

W RUTHVEN GEMMELL WS
TRIBUNAL JUDGE

RELEASE DATE:    20  NOVEMBER 2009 
EDN/08/9501